Hummer Winblad Venture Partners is nearing a $200 million final close on its sixth fund, having already raised $183.5 million in commitments.
The fund is targeted for $200 million and is substantially smaller than the firm’s fifth fund, a $424 million vehicle raised in 2000. It is also the San Franciso-based firm’s first fund since its failed investment in Napster.
The venture firm bought 21% of the music file sharing company for $13.5 million in 2000. Later that same year, Universal Music Group and EMI Recorded Music filed suit against Hummer Winblad along with Napster co-investor Bertlesmann Capital Ventures. The suit claimed that Napster “…provided a safe haven for the rampant piracy of copyrighted works on an epic and unprecedented scale,” and that “…Hummer Winblad knowingly facilitated infringement of plaintiff’s copyrights for its direct financial benefit.”
The suit dragged on until late last year when the record labels won sanctions against the firm for inadvertently destroying emails related to Napster. Then the judge ruled that investing in Napster could be viewed as inducement to infringe on copyrights. The court battle turned when EMI and Universal were ordered to submit documents they had shared with their lawyers. The labels settled with Hummer Winblad out of court instead.
Eight months later, Hummer Winblad is nearing close of fund VI and has already invested in three portfolio companies from the new fund. Fund-raising began a little more than six months ago, says Partner Mitchell Kertzman. The fact that the court settlement and the launch of fund-raising coincided was not intentional, Kertzman says. The firm was just ready to take on more cash, he says.
The firm experienced some turn-over in its limited partners. LPs in the new fund include J.P. Morgan Pooled Venture Capital Institutional Investors III, National Nominees Limited As Nominee for VFMC Infrastructure Fund II and the State Street Bank and Trust Company as Trustee for the Northrop Grumman Pension Master Trust, according to regulatory documents. Kertzman attributes the LP turnover to the firm’s poor performance during the dot-com era, when it was primarily investing out of its $318 million fourth fund raised in 1999.
“There are LPs that have been there since the beginning, but fund IV results factored into some LPs’ decision [to not invest in fund VI],” Kertzman says.
Despite the fact that the firm invested in Napster from fund IV, it also backed Omniture (Nasdaq: OMTR), which completed a $70 million IPO last summer.
“Every great VC was a phenomenal believer in companies that turned out failures,” Kertzman says. “You expect people to make mistakes. What you don’t want to see is them not learning from them. We’ve been analytical and introspective to what we’ve done well and where we’ve failed.”
However, several years ago, the partners sat down and pored over every investment since the firm was launched in 1989. The takeaway was that the firm did well in software infrastructure and applications, but poorly in consumer deals. Among its more infamous busts were Pets.com, HomeGrocer, Gazoontite and Mombo. So the firm has ditched consumer-focused investments.
Kertzman, who joined the firm in 2003 after a career as a tech entrepreneur and executive, has easily taken to the software-only investment thesis. “I joked about this when I got here: had I been Rip Van Winkle at the time of the funding and then woken up in Hummer Winblad in 2003, I would have assumed that nothing had changed.”
So far this year, Hummer Winblad has backed 13 companies with a combined $22.4 million, according to Thomson Financial (publisher of PE Week). Although most of the companies are clearly software-focused, there are a handful of next-generation Internet startups there, too. The firm backed PostApp, makers of WidgetBox, a website for blogging, auctioning, social networking and homepage making, in an undisclosed round in May.
The firm also invested $1 million in mobile phone note-taking startup Kwiry in March.
Still, what looks consumer-oriented today may be enterprise oriented tomorrow. As Kertzman points out: “Enterprise software is changing, delivery and pricing is changing, the technology is changing.”